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Optimal feedback control of stock prices under credit risk dynamics

Author

Listed:
  • Jinghai Shao

    (Tianjin University)

  • Sovan Mitra

    (University of Westminster, School of Finance and Accounting)

  • Andreas Karathanasopoulos

    (University of Dubai)

Abstract

In this paper we provide a stock price model that explicitly incorporates credit risk, under a stochastic optimal control system. The stock price model also incorporates the managerial control of credit risk through a control policy in the stochastic system. We provide explicit conditions on the existence of optimal feedback controls for the stock price model with credit risk. We prove the continuity of the value function, and then prove the dynamic programming principle for our system. Finally, we prove the Viscosity Solution of the Hamilton–Jacobi–Bellman equation. This paper is particularly relevant to industry, as the impact of credit risk upon stock prices has been prominent since the commencement of the Global Financial Crisis.

Suggested Citation

  • Jinghai Shao & Sovan Mitra & Andreas Karathanasopoulos, 2022. "Optimal feedback control of stock prices under credit risk dynamics," Annals of Operations Research, Springer, vol. 313(2), pages 1285-1318, June.
    • Handle: RePEc:spr:annopr:v:313:y:2022:i:2:d:10.1007_s10479-021-04002-6
    DOI: 10.1007/s10479-021-04002-6
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